Chapter 10: Auditing the Revenue Process

Question 1

Revenue

Answer 1

inflows or other enhancements of assets of an entity or settlements of its liabilities from delivery or producing goods, rendering services, or other activities

Question 2

Fraud Risks in Revenue Recognition (4)

Answer 2

1. Side agreements
2. Channel Stuffing
3. Related party transactions
4. Bill and hold sales***

Question 3

3 types of transactions that are typically processed through the revenue process

Answer 3

1. The sale of goods or rendering services for cash or credit
2. The receipt of cash from the customer in payment for goods or services
3. The return of goods by the customer for credit or cash

Question 4

Accts affected by sales transactions

Answer 4

accts receivable
sales
allowance for uncollectible accts
bad debt exp

Question 5

Accounts affected by Cash receipts

Answer 5

cash
accts rec
cash discounts

Question 6

Accounts affected by sales returns and allowances

Answer 6

sales returns
sales allowances
accts rec

Question 7

Credit approval form

Answer 7

for credit sales, the entity must have a formal procedure for investigating the creditworthiness of the customer

Question 8

Customer sales order

Answer 8

contains the details of the type and quantity of products or services ordered by the customer

Question 9

Open order report

Answer 9

a report of all customer orders which are not filled yet

Question 10

Shipping document

Answer 10

serves as a bill of lading and contains info on the type of product shipped, the quantity shipped, and other relevant info

Question 11

sales invoice

Answer 11

used to bill the customer, contains info on the type of product or service, the quantity, the price, and terms of trade

Question 12

Sales journal

Answer 12

used to record information about the sales transaction

Question 13

Customer Statement

Answer 13

document that is mailed or emailed to the customer and contains details of all sales, cash receipts, and credit memorandum transactions

Question 14

Accts rec Subsidiary Ledger

Answer 14

contains an acct and the details of transactions for each customer

Question 15

Aged trial balance of accts rec

Answer 15

summarizes all customer balances in the AR sub ledg. Each acct is classified as current or placed into one of the past due categories

Question 16

Remittance Advice

Answer 16

part of the customers bill that should be returned with the payment and states what invoices the customer paid for

Question 17

Cash receipts Journal

Answer 17

used to record cash receipts of entity

Question 18

Credit memo

Answer 18

used to record credits for the return of goods by a customer

Question 19

Write off authorization

Answer 19

authorizes the write-off on an uncollectible AR, authorized by treasurer

Question 20

Functions of the revenue process (7)

Answer 20

1. order entry
2. credit authorization
3. shipping
4. billing
5. cash reciepts
6. accts rec
7. general ledger

Question 21

order entry

Answer 21

acceptance of customer orders for goods and services into the system in accordance w/ management criteria

Question 22

Credit authorization

Answer 22

Appropriate approval of customer orders for creditworthiness

Question 23

Shipping

Answer 23

Shipping of goods that has been authorized

Question 24

Billing

Answer 24

Issuance of sales invoices to customers for goods shipped or services provided; also, processing of billing adjustments for allowances, discounts, and returns

Question 25

Cash receipts

Answer 25

processing of the receipt of cash from customers

Question 26

Accounts Receivable

Answer 26

Recording of all sales invoices, collections, and credit memo in individual customer accounts

Question 27

General Ledgers

Answer 27

Proper accumulation, classification, and summarization of revenues, collections, and receivables in the financial statement accounts

Question 28

Inherent Risk factors that may affect the revenue process (4)

Answer 28

1. Industry-related factors
2. the complexity and contentiousness of revenue recognition issues
3. the difficulty of auditing transactions and account balances
4. misstatements detected in prior audits

Question 29

Control Risk Assessment (3)

Answer 29

-understand and document the revenue process based on a reliance strategy
-plan and perform tests of controls on revenue transactions
-set and document the control risk for the revenue process

very few situations reliance strategy is not the right answer when auditing the revenue cycle

Question 30

Control Environment

Answer 30

Understanding the control environment is generally completed on an overall entity basis

Question 31

The entity’s risk assessment process

Answer 31

auditor must understand how mgmt considers risks that are relevant to the rev process
-auditor should estimate the significance of the risk and assess the likelihood of occurrence

Question 32

Control Activities

Answer 32

auditor identifies what controls ensure that the assertions for transactions and events are being met

Question 33

Tests to test controls over the revenue process

Answer 33

-Inquiry of client personnel
-Inspection of documents and records
-observations of the operation of the control
-walkthroughs
-reperformance of the control activities

Question 34

Plan and perform tests of controls

Answer 34

auditor systimatically examines the entity’s rev process to identify relevant risks of material misstatement and controls that help to prevent, or detect and correct, those misstatements

Question 35

Set and document the control risk

Answer 35

If the results of the tests of controls support the planned level of control risk, the auditor conducts the planned level of substantive procedures for the acct balances

the level of control risk for the revenue process con be set using either quantitative amounts or qualitative terms such as “low”, “medium” or “high”

Question 36

Occurrence

Answer 36

all rev and cash receipt transactions and events that have been recorded or disclosed have occurred, and such transactions and events pertain to the entity

Question 37

Completeness

Answer 37

all rev and cash receipt transactions and events that should have been recorded, and all related disclosures that should have been included in the financial statements have been included

Question 38

Authorization

Answer 38

all revenue and cash receipt transactions and events have been properly authorized

Question 39

Accuracy

Answer 39

Amnts and other data relating to recorded rev and cash receipt transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and descibed

Question 40

Cutoff

Answer 40

all rev and cash receipt transactions and events have been recorded in the proper accts

Question 41

Classification

Answer 41

All rev and cash receipt transactions and events have been recorded in the proper accts

Question 42

Presentation

Answer 42

all rev and cash receipt transactions and events are appropriately aggregated or disaggregated and clearly described and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework

Question 43

Substantive analytical procedures

Answer 43

used to examine plausible relationships among revenue related accts

plausible relationships b/w financial and non financial data

Question 44

Test of details

Answer 44

focuses on transactions, acct balances, or disclosures. concentrates on the ending balance for accts rec and related accts as well as related disclosures

Question 45

Ratios used for comparative purposes (5)

Answer 45

1. receivables turnover and days outstanding in accts receivables
2. aging categories on aged trial balance of accts rec
3. bad debt expense as a percent of revenue
4. allowance for uncollectible accts as a percent of accts rec or credit sales
5. large customer acct bals compared to last month

Question 46

Confirmation of a/r

Answer 46

audit evidence that is a direct written response from third parties about the acct rec bal

good source of evidence about the existence of the a/r

confirmation process should be controlled by the auditor

Question 47

Reasons for omitting confirmations (3)

Answer 47

-Accts rec bal is immaterial
-external conf would be ineffective (based on prior experience)
-auditors assessed level of risk of material misstatement at the relevant assertion level is low, and the other planned substantive procedures address the assessed risk

Question 48

Types of confirmation requests (2)

Answer 48

1. positive
2. negative

Question 49

Positive Confirmation Request

Answer 49

Must receive confirmation from customers regarding their acct balances